Wall Street: bonus at risk vs value at risk

So we have the leader of the largest economy in the world, whose currency parallels gold as a store of value and a medium of exchange—the highest mark of respect in the non-real universe of finance—whose bonds fill vaults in China and the Oil bloc, whose people consume so that the world can grow. He. Saying many, many times. I will fight!

Nope, this is not George W. Bush lifting a fist against those with weapons of mass destruction. This is US President Barack Obama, publicly livid at those who turned money into a weapon of global destruction. As he tries to push Bills (the opinion of whether these Bills go far enough is still totally split between those who say no and those who moan about curbing the natural instincts of entrepreneurship and getting over-regulated) through the Senate seeking to fix the structural problems on Wall Street that have caused such deep Main Street anguish, he finds the push-back from incumbents quick and strong. In a statement a fortnight back, he talked of an army of industry lobbyists from Wall Street descending on Capitol Hill and that “if these folks want a fight, it’s a fight I’m ready to have”.

He’s going to fight the Banks. Fight the war chest of Wall Street that pours out its cash to smother all attempts that put bonuses at risk. Says a former securities lawyer, Jennifer Taub, in her tweet @jentaub: “It was not VaR (value at risk) but actually BaR (bonus at risk) that drove irrational behaviour on Wall Street.”

Now that the patient is out of mortal danger, the battle on who shot him and how the latter should be punished plays out in the US. On one side is the rich and powerful Wall Street lobby and on the other is a government process that finds itself ridden with conflicts of interest and of a system that allows big business unlimited rope. The current fight is between the banks and the Volcker Plan.

Obama is putting his weight behind the former chairman of the US Federal Reserve and chairman of the president’s economic recovery advisory board, Paul Volcker, who has a two-pronged plan. One, limit the size of the big banks, and two, reduce their risk-taking activities. Said Obama about the danger of being too large: “Never again will the American taxpayer be held hostage by a bank that is ‘too big to fail’.” The bigger problem has been the use of depositors’ money to take excessive risk for private speculative profit. Of banks giving a tiny return on deposits but using that money to gamble madly to keep their bonuses above risk.

Nobody with both hands in the cookie jar (and guarded by arms-bearing bouncers) is going to give up the treats. And, therefore, the domestic all-American spat between politics and business that the world watches. But behind the Wall Street smoke and mirrors, the tiny truth is this: While banks played roulette with public money, the regulators and the government looked the other way. Why’d they do that? A business-ambushed White House was told that London or (horrified gasp!) Dubai could become the new global financial hub if regulators came in the way of money. A race to the bottom works not just in industry segments, but also globally among countries.

For India, this drama is some sort of a Nehruvian nightmare come true. So, here is India, already more than two decades into converting to free markets, at a time when capitalism itself looks shaky. Profit in India was a dirty word when we got political independence. Big Wall Street bonuses are the new dirty word in the US. Tweets John Gillespie, author of Money for Nothing, a book on the deep, dark secrets of big business, on @CorporateBoards: “Average bonus paid at some bailed out banks this week = 24 times what the average American has in their entire life savings.”

Where do we go from here? We’re half-way and the world blows apart. Going back is not an option (I swear I can’t deal with a red-lipped MTNL linesman or a knitting Neeta at the bank again). Going forward? One view is that the global economic crisis could not have happened at a better time for us. We’re on the threshold of full convertibility, of a deeper integration with the world economy, of market practices and norms that are more global than before. And just as it seemed that the free market fundamentalists were winning the ideological battle, the global shudder on the market’s excesses gives us another thought. Free markets work, but only with adequate and effective regulation in place. Our policy failure would be to underestimate the risk of allowing banks or businesses to get to a stage where they are too big to fail and to allow regulatory ennui and a lack of coordination to continue. Smart policy would use this time of transition to reorient regulations and regulators to look at the world from the point of view of the individual—employee, consumer and investor. It’s simpler, less noisy and the policy choices become quickly very clear.

Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and can be reached at expenseaccount@livemint.com